While it's been widely noted that the Nonadmitted and Reinsurance Reform Act (NRRA), part of the Dodd Frank ruling won't apply to captives, “it has gotten people paying attention to self-procurement taxes again,” he says. A self-procurement tax is a state-imposed premium tax of up to 4 percent on premiums paid to most captives.

Osborne adds, “It's a huge movement, and it's going to be a problem for the Vermonts, South Carolinas and Hawaiis of the world.”

Because of the economic downturn as well, he says, forming a captive in a company's home state is now seen as an advantage.

An independent white paper released in the fall, however, concludes that the law has no applicability to captive insurance. The white paper was commissioned by the Vermont Captive Insurance Association (VCIA) and prepared by the law firm of McIntyre and Lemon, PLLC, Washington, D.C.

Dave Provost, deputy commissioner of captive insurance in Vermont tells NU in October, “If you had, or did not have a surplus lines or self-procurement tax issue before Dodd Frank, it didn't change anything. It didn't change the state's laws on the taxation of captive premiums.”

Some of the misunderstanding, he explains, is that people were “panicking that they needed to move their captive to their business' home state to avoid self-procurement tax. But if it didn't apply before, it doesn't apply now.”

Osborne observes that if a company forms a captive in its domiciled state, any questions about “who will be the directors, where and when can you have meetings, where can you issue policies, all those issues disappear—and you've also addressed [the issue of] self-procurement taxes.” Osborne says.

So far about 36 states have captive laws on the books. Florida is on the verge of becoming a captive domicile and Oregon is on its way, he adds, pointing out the number of states that are passing captive regulations.

Companies in states that don't have captive statutes, such as California, will form their captives in states that do and will “take every step they can, not have to deal with procurement taxes,” Osborne says.

He notes, “There's not an up-and-coming domicile as much as there is a trend, for many reasons, to domicile in your home state.”

New York, he adds, was ahead of the curve in that all its captives are now New York-based companies. In fact, the one New Jersey-based captive has relocated to New Jersey, he says.

Domiciles now being formed are recognizing the trend and creating captive regulations making it more advantageous for organizations to form captives in their home state.

Osborne notes that a number of captives under his company's management are now re-domiciling. “I'm now thinking it would be 19 or 20 states,” he says, adding, “If you ask me where I am going to be putting business, I don't know. It's going to be driven heavily by whether it makes sense to do business in their home state, before going somewhere else.”

Not only will states be making themselves available for captive formations, they also will be actively recruiting captives, he says. “At the moment it's friendly, but it could get unfriendly.”

For example, Missouri could argue that a company headquartered in Missouri operating in California, “Under Missouri's interpretation of the Surplus Lines act, could argue that you owe them the tax on everything, because that's your home state.”

Even though this hasn't yet been tested, he says, some companies are going the route of domiciling in their home state to be safe.

“In some ways it's an easy choice to make,” he says. “Pay Missouri the captive premium tax and take that potential off the table.”

While in the past a big consideration for those forming captives was domiciling in a state with solid infrastructure, Osborne says that those states adopting legislation are doing a good job of building a solid program and bringing in staff with an understanding of captives.

Will the many captive companies located in Vermont—one of the world's largest captive domiciles—leave?

Osborne doesn't believe there will be a mass exodus. “This is a big deal if you're a $10 million captive or more,” he says. “If you're a $1 million, $2 million or $3 million captive it's not going to be a huge difference.”

For the larger captives, however, “If the state did decide to come after you for procurement tax, you could be looking at $200,000-$500,000” he explains. “So if you're forming a new one, why not take that off the table?”